Emerging market value stocks are the most attractive asset class for two reasons, explains GMO's John Thorndike.

“First, emerging market stocks broadly are priced to deliver decent absolute returns,” says Thorndike. “Second, value stocks within emerging markets look particularly cheap.

“Of course, value stocks always look cheap relative to the broad market; that’s how value stocks are defined. Today, these stocks trade at a wider discount than they have historically, and wider than we think is warranted by their fundamentals. If broad emerging markets can indeed deliver the 4.5% real return that we forecast and EM value stocks can trade at a normalized discount to broad emerging markets, then EM Value stocks look poised to deliver nearly double-digit real returns.

“When we look around the world and see many asset classes priced to lose money in real terms, the prospect of earning a 9-10% return from EM Value stocks becomes all the more interesting for investors with the flexibility and patience to concentrate in this unloved segment of global markets.”

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